Three Steps for Uncertainty

"I think the Federal Reserve is facing
a huge dilemma right now, and that uncertainty makes the stock market tough to
read," says Jim Jubak. Here, he offers a three-pronged
investment strategy to help investors cope with that
uncertainty.

"Personally, I think the
Federal Reserve will put off at least one of the two interest rate hikes that investors
had been expecting in the remainder of 2005. Greenspan's Federal Reserve always
likes to rely on data, data, and more data in making decisions. Right
now, almost everything they know about the economy comes from before Katrina. That
said, I'm certainly not 100% certain how the Fed will react, and that
leads to my three-part stock strategy designed to avoid relatively predictable
post-Katrina losses and to increase exposure to potentially profitable stocks
and sectors.

"First, avoid those sectors that are going
to take a post-Katrina hit from higher prices for energy and other commodities
that are especially susceptible to a slowdown in consumer spending. Especially
avoid sectors where the cost of likely business disruptions outweighs potential
revenue gains from higher prices. I'm not talking rocket science here: In the
next couple of quarters, companies in the airline, automobile and trucking
industries will get slammed by higher fuel costs.

"Other sectors, such as retail and
financial, don't require wholesale avoidance. But investors need to cut back on
exposure to the shares of companies with higher-than-average vulnerability
exposure to slower economic growth and slower consumer spending. In retail that
means thinking twice (or more) about shares of companies with
higher-than-average exposure to lower-income consumers.

"In finance, the
same caveats apply to companies with substantial exposure to consumers with
less-than-sterling credit. With railroads, I'd avoid companies where the
potential damage to their system outweighs the company's ability to increase
revenue by grabbing more traffic at higher prices. So I'd avoid
CSX (CSX NYSE) because of its geographical exposure to
system disruptions in the Southeast. On the other hand, I'd look to add shares
of railroads with less regional exposure and better management such as
Burlington Northern Santa Fe (BNI NYSE) or Canadian National Railway (CNI NYSE)

"Second, look for companies positioned to
profit from the way that Katrina has shifted costs in the economy. The rapid
rise in the price of oil and natural gas makes me look at shares of coal
companies. Coal had a substantial cost advantage before Katrina. It looks even
more attractive as an alternative fuel after Katrina. Peabody
Energy (BTU NYSE) is the obvious choice but Penn Virginia
Resources (PVR NYSE), with its greater exposure to Eastern coal
(an advantage if shipping is an issue for the long term) runs a close second.

"Another place to look for companies like this is in the utility sector.
Here, a utility such as FPL Group (FPL NYSE), the largest producer of electricity from
wind power in the US, looks even more attractive in a post-Katrina economy.
General Cable (BGC NYSE), a supplier to the utility industry, will see
increased sales from infrastructure rebuilding along the Gulf Coast and from the
continued push to increase the electricity grid's capacity to ship power long
distances.

"In the oil service sector I'd look for shares of companies
whose assets have escaped major damage from Katrina and that are positioned to
gain major new work as the oil industry rebuilds. Cal Dive
International (CDIS NASDAQ), for example, has a fleet of manned and
robotic undersea construction vehicles that exactly fits the needs of oil and
gas companies in the Gulf of Mexico.

"Third, and finally, I'd look to
increase my exposure to sectors of the economy widely known for their lack of
exposure to the price of energy. If worries about the economy start to get
really serious, seeking refuge in stocks such as PepsiCo (PEP NYSE) and United Natural Foods (UNFI NASDAQ),
which will start to look increasingly attractive
to larger numbers of investors. But if worries about the economy don't
intensify, I think the technology sector will be the place to be for investors
seeking to avoid rising energy costs and looking for higher than average revenue
growth. Broadcom (BRCM NASDAQ) is my one pick in that sector right
now."